Stabilization and the aftermarket prices of initial public offerings

Stabilization and the aftermarket prices of initial public offerings The paper examines the determinants of stabilization and its impact on the aftermarket prices. We use a unique dataset to relax several assumptions in the stabilization literature. We find that underwriters support IPO prices shortly after listing, particularly in cold markets and when demand is weak. We also show that stabilized IPOs are more common amongst reputable underwriters. This finding suggests that stabilization may be used as a mechanism to protect the underwriter’s reputation. It also implies that reputable underwriters may possess private information and price IPOs closer to their true values (i.e., higher than those indicated by the weak premarket demand). Consistent with the latter view, we show that stabilized IPOs are offered at higher prices and suffer less underpricing than those indicated by the premarket demand, firm characteristics and market-wide conditions. The post-IPO performance results indicate that stabilized IPOs are unlikely to be mispriced as their prices do not exhibit any significant reversal after the initial stabilization period. We conclude that stabilization may be superior to underpricing as it protects investors from purchasing overpriced IPOs, benefits issuers by reducing the total money “left on the table” and enhances the overall profitability of underwriters. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Stabilization and the aftermarket prices of initial public offerings

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Publisher
Springer Journals
Copyright
Copyright © 2012 by Springer Science+Business Media, LLC
Subject
Economics / Management Science; Finance/Investment/Banking; Accounting/Auditing; Econometrics; Operations Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-012-0315-y
Publisher site
See Article on Publisher Site

Abstract

The paper examines the determinants of stabilization and its impact on the aftermarket prices. We use a unique dataset to relax several assumptions in the stabilization literature. We find that underwriters support IPO prices shortly after listing, particularly in cold markets and when demand is weak. We also show that stabilized IPOs are more common amongst reputable underwriters. This finding suggests that stabilization may be used as a mechanism to protect the underwriter’s reputation. It also implies that reputable underwriters may possess private information and price IPOs closer to their true values (i.e., higher than those indicated by the weak premarket demand). Consistent with the latter view, we show that stabilized IPOs are offered at higher prices and suffer less underpricing than those indicated by the premarket demand, firm characteristics and market-wide conditions. The post-IPO performance results indicate that stabilized IPOs are unlikely to be mispriced as their prices do not exhibit any significant reversal after the initial stabilization period. We conclude that stabilization may be superior to underpricing as it protects investors from purchasing overpriced IPOs, benefits issuers by reducing the total money “left on the table” and enhances the overall profitability of underwriters.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Sep 12, 2012

References

  • Price stabilization as a bonding mechanism in new equity issues
    Benveniste, LM; Busaba, WY; Wilhelm, WJ
  • Underwriter short covering in the IPO aftermarket: a clinical study
    Boehmer, E; Fishe, R
  • The post-issue market performance of initial public offerings in China new stock markets
    Chen, G; Firth, E; Kim, JB
  • Underwriter reputation and underpricing: evidence from the Australian IPO market
    Dimovski, W; Philavanh, S; Brooks, R
  • Factors affecting investment bank initial public offering market share
    Dunbar, CG

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